Ouch. The last few months have been a true test of character for most equity investors. Even professional investors have had a hard time navigating the swift downfall of tech stocks: famed technology investor Tiger Global lost $17 billion so far this year.
How much deeper, and how much longer can this go on?
We tried to answer the first part - how much deeper - in these pages yesterday. The pretty clear-cut conclusion was that, right now, the technical, fundamental, and macro picture aren’t sending an “all-clear” yet. Neither valuation nor market internals are compelling enough for a skewed risk-reward trade.
Ok, if not now, then when?
Cyclical vs. Secular
To answer this question, it’s worthwhile introducing the framework of cyclical and secular market trends. I’ll summarize it here but hat tip to Barry Ritholtz whose outstanding blog has a far better explanation of this distinction - highly recommended!
A secular bull market is a broad expansion in the economy across a range of sectors, often powered by innovation and technological developments. It can last anywhere from 15 to 20 years. A secular bear market, according to Ritholtz, will typically be shorter, ranging from 7-10 years.
A cyclical market, in contrast, is a move against the prevailing trend. It is much shorter in duration and depth, often confined to a narrower driver. For example, market drop in 2020 - however brief - was a cyclical bear market driven entirely by the healthcare scare. If the response (fiscal and monetary stimulus, vaccine research) had been less forceful, the drop may well have gone deeper and went on longer.
What are we in?
One of the most recent and famous secular bull markets is the period between 1983 and 2000 when the United States entered into one of the greatest economic expansions in its history.
If you look at the chart below (courtesy Bank of America via The Big Picture), you can see that we are currently in the third postwar secular bull market that started back in 2013.
Timing is everything
Why is this distinction important? Because it gives you a far better framework to evaluate the opportunity that the current market may soon offer.
First, we are only two thirds of the way through the secular bull market. Second, inflation plays a similar role in this sell-off that the pandemic did in the last cyclical bear market in 2020. If the response from the Fed is forceful enough, the deep correction we are witnessing will turn out to be a cyclical bear market.
A cyclical bear market duration is typically measured in months, not years, so we may be (almost) halfway through it already. Sooner or later, and history suggests it’s sooner rather than later, the secular bull market will reassert itself and could go on for another 5+ years … or longer.